The value of Twitter

After the problems and negative publicity surrounding Facebook’s $100bn flotation in 2012, Twitter’s debut on the NASDAQ stock exchange can only be described as a resounding success. After debuting at an initial price of $26 per share, the share price has rocketed to a staggering $41 as of 20th November. This huge market capitalisation is incredible when one considers that by any common sense measure, Twitter is a failing business. The company, founded in 2006, has never turned a profit. In just one quarter this year, Twitter lost $65mn. Whilst it has some 500 million registered users, only half that number uses the service each month; Reuters claimed that one third didn’t use Twitter at all.

Yet Twitter is just the latest in a string of high profile valuations for social media firms. In October, Pinterest was valued at $3.8bn; in perspective, the BBC equated that to the value of the UK’s second largest home builder, Barratt Homes. The big difference is that Barratt made a profit last year. Pinterest has never made any money. Only last week, Snapchat revealed that it had been the subject of a $3bn takeover offer, despite only being in existence for two years at most.

Against that backdrop, how can a company specialising in 140-character messages be worth upwards of £15bn? The answer usually given is that Twitter has growth potential; in particular it’s large and crucially mobile user base is seen as a gold mine for Twitter to sell advertising. Facebook and Google have achieved enormous market value through the sheer weight of consumer data they process, and investors see Twitter in the same light. However, the basis of this confidence has already been questioned. Mary Jo White, Chairwoman of the US Securities and Exchange Commission (SEC), has already publically questioned the growing trend for internet companies to be valued on the number of users they supposedly have.

That is the major question for Twitter, Facebook, and the growing market for social media. In a market that has been stung before on the promise of outrageous growth in an emerging internet industry, how do Twitter’s millions of users become a source of actual wealth? The current rows over the NSA spying scandals have surely exposed public resistance to someone else profiting from the use of personal information. But more importantly, how long will investors remain convinced in the advertising potential of a service such as Twitter?

Whilst many analysts have argued that Facebook, Twitter et al. have learned the lessons of MySpace – a service built on the same premise that suffered an extraordinary decline in just seven years after being purchased by News Corporation in 2005 – the SEC’s opinion on Twitter’s valuation should certainly sound a warning.

Social media has enjoyed an extremely high profile over the last few years; its apparent role in propagating the revolutions of the Arab Spring has been well documented in the Western media. The rapid emergence of often small start- up firms has been endorsed as a driver of economic growth by the US government. Only last year, an act designed to boost job creation in a stuttering US economy introduced less stringent requirements for IPO filings by small technology firms. However, recent history should teach us that a ‘dot-com boom’ can just as rapidly become a ‘dot-com bomb’.